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Asset Classes and Valuation Flashcards

6 cards from real IMC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. A UK government gilt with a coupon of 4% and a face value of £100 is currently trading at £95. What is its current yield?

    Answer: 4.21%

    Current yield = Annual Coupon / Current Market Price = £4 / £95 = 4.21%. The current yield is higher than the coupon rate because the bond is trading at a discount to its par value.

  2. Which of the following is a key characteristic of preference shares?

    Answer: They receive dividends before ordinary shareholders and have priority in liquidation

    Preference shares rank above ordinary shares for dividend payments and in the event of liquidation. They typically pay a fixed dividend and must receive their dividend before any payment is made to ordinary shareholders. However, dividends are not guaranteed — the board must still declare them.

  3. What is the intrinsic value of an in-the-money call option?

    Answer: The amount by which the underlying asset's price exceeds the strike price

    For a call option, intrinsic value equals the current price of the underlying asset minus the strike price (when positive). If the share trades at £120 and the strike is £100, the intrinsic value is £20. The option is in-the-money because exercising it would yield an immediate gain.

  4. Which valuation model estimates the value of a share by discounting expected future dividends?

    Answer: The Dividend Discount Model (DDM)

    The Dividend Discount Model values a share as the present value of all expected future dividend payments. The simplest form, the Gordon Growth Model, assumes dividends grow at a constant rate: P = D₁ / (r - g), where D₁ is next year's dividend, r is the required return, and g is the growth rate.

  5. A corporate bond is described as 'investment grade'. According to major credit rating agencies, which of the following ratings qualifies?

    Answer: BBB-

    Investment grade ratings range from AAA down to BBB- (S&P/Fitch) or Baa3 (Moody's). Anything below BBB-/Baa3 is classified as sub-investment grade or 'high yield'. BB+ is the highest sub-investment grade rating, while CCC and D indicate very high risk or default.

  6. What is the primary risk associated with investing in commercial property as an asset class?

    Answer: Illiquidity risk

    Commercial property is inherently illiquid compared to financial assets like equities and bonds. Selling a property can take months and involves significant transaction costs. This illiquidity risk means investors may not be able to exit their position quickly without accepting a significant discount.